Berkshire Hathaway May Start Paying Dividends

5/10/2017

According to Fortune Magazine, Berkshire Hathaway is now considering initiating dividend payments. Berkshire Hathaway is a publicly traded corporation led by legendary investor Warren Buffett. While Buffett considers dividends as part of his investment strategy, Berkshire has never paid a dividend. Buffett feels that Berkshire can make more money for investors by reinvesting its profits rather than paying dividends. Yet he seeks dividend payers as he invests Berkshire funds. Additionally, Buffett has advised for quite some time that retirement savers invest in dividend payers as part of their personal investment strategy. Buffett, now 86 years old, is reportedly considering retirement. For years Berkshire has not bought back its stock. It is now considering stock-buybacks.

Berkshire has made substantial investments in Apple, the world’s top dividend payer in total dollars. According to the Wall Street Journal, Apple has repurchased almost 21% of its stock since 2012. Buybacks, along with the iPhone’s success, have contributed to Apple’s rising earnings per share and its record high stock price of $153.99 on May 9. Apple’s market capitalization is more than $800 billion, a first for any U.S. company.

For many years the company, led by world’s greatest investor, has avoided paying dividends and buying back stock. It has now invested in America’s largest company which pays more in dividends than any company in the world and has bought back more than 20% of its stock.

Questions: What is a good stock buyback? When should a corporation pay dividends? Should an investor buy dividend-paying stock?

17 Comments

Bryce B

5/14/2017 12:42:47 pm

Stock buybacks are good when they are to benefit the company buying back the stock. By repurchasing stock, companies can reduce the number of company shares outstanding which, in turn, increases the earnings per share ratio. This is also good for shareholders who sell their shares in the buyback and the ones who hold on to the stock because they will see the value rise (MacEwan, 2016).
A good example for when companies should pay dividends is when they are being targeted for acquisitions. This is more applicable to small cap companies because they are easier to acquire when they have a lot of excess cash in their balance sheets. The cash can be used as leverage, and the company looking to make the acquisition doesn’t have to come up with as much cash since the company being acquired will already have a lot of cash on the books (Guglani, 2012).
I think investors should invest in dividend-paying stocks because they can take advantage of getting the steady payments. They also have the choice of reinvesting the dividends by purchasing additional shares of stock if they choose.

References

MacEwan, A. (2016, November/December). Stock Buybacks: Any Positive Outcome? . Dollars & Sense, pp. 30-31.

https://seekingalpha.com/article/344681-when-a-company-should-and-shouldnt-pay-dividends

Ilsa

5/16/2017 09:28:31 pm

A good stock buyback returns cash to shareholders, reduces the total number of shares outstanding and increases the valuator the remaining shareholders. Buybacks make sense under specific conditions;
1. The company is buying back shares for cents on the dollar.
2. The company's balance sheet and free cash flow should be strong enough to support the buyback without jeopardizing future liquidity or investment opportunities.
3. The company should have more cash than it does profitable investment opportunities. One company that meets this criteria is Oracle.

A corporation should pay dividends to satisfy investor demands, assuming the company's debt is under control. Smaller cap companies that maybe targets of unwanted acquisitions should pay dividends to rid their balance sheet of excess cash.

Yes! An investor should buy dividend paying stocks. Investors choosing dividend paying stocks can back companies the United States as well as abroad. Companies with a world wide presence aren't as severely impacted when a single nation enters a recession or faces a more severe economic downturn. Dividend paying stocks generally bounce back and continue generating income, even when the market is down.

https://www.forbes.com/sites/greatspeculations/2016/02/24/how-stock-buybacks-destroy-shareholder-value/#3a0b2c667841

https://seekingalpha.com/article/344681-when-a-company-should-and-shouldnt-pay-dividends

http://www.kiplinger.com/article/investing/T018-C032-S014-why-you-should-invest-in-dividend-paying-stocks.html

Maria O

5/14/2017 08:37:33 pm

A good buyback is a fairly, low-risk approach for companies to use extra cash and re-invest it into R&D or a new product. Although, a new product can be risky. If these new investments do not pay off, that hard-earned cash and efforts are wasted. A good buyback is when companies invest in themselves because they are confident their shares are undervalued and offer a good return for shareholders. (McClure, 2014)

I believe investors should buy dividend-paying stocks, especially from companies that are stable and generate plenty of free cash flow. Investors want to see consistent income coming from their dividends and not have to worry about having to sell them because they need cash. Investors also want to be able to reinvest their dividends and buy more shares, which allows them to earn even more dividends. For example, Proctor & Gamble Co. (PG) is a stock that pays a strong 3.2 percent dividend and has increased its payout for 59 consecutive years. (Binger, 2016)

http://www.investopedia.com/articles/stocks/10/share-buybacks.asp

http://money.usnews.com/investing/articles/2016-03-03/why-you-should-own-dividend-stocks

Tina D

5/15/2017 03:34:35 pm

A good stock buyback is one that achieves the goals the company is looking to achieve. What does that mean in a nutshell? If the company is looking to raise their share price, then a stock buyback will do that by reducing the number of shares on the available market. (Wohlner, R. 2015) If they are looking to prevent a hostile takeover of their company, then buying back a load of their shares would protect them from companies who are preying on them.
However, if the company is looking to prove to the public that their company is not in financial trouble, a stock buyback is not a good way to go about it. Stock buybacks can be a way that a company can artificially inflate earnings per share and therefore show a more positive outlook to the public.
Rather than start a stock buyback program, some companies decide to distribute cash to their stock holders in the form of a dividend. A company must decide when and when not to pay a dividend. Stocks that pay a dividend are very attractive in today’s market for investors which may drive people to a company’s stock as opposed to a bond or CD that are substantially lower returns. (Guglani, A. 2012)
Another time that a company may decide to pay a dividend is when they are ripe for acquisition. A company with high cash on their balance sheets is a potential target by larger companies and may choose to pay a dividend to their shareholders to rid the company of the stock pile of cash. (Guglani, A. 2012)
When deciding if you should purchase dividend-paying stock, an investor should keep in mind that you should not just chase down the highest dividend. If it looks too good to be true it could be a trap. (Saletta, C., 2017) Companies with a large dividend could be hiding less than positive outlooks on its debt. You should look at the company’s payout ratio. The payout ratio is the % of earnings a company pays out to shareholders. If a company is paying out a very high % they cannot sustain that for long as they must cover some future growth or use for unexpected expenses with those earnings. An investor should also get a feel for the company’s growth. Companies that are in a growth period will typically increase their dividend and thus, put more money in your pocket.

http://www.investopedia.com/articles/financial-advisors/121415/stock-buybacks-good-thing-or-not.asp
https://seekingalpha.com/article/344681-when-a-company-should-and-shouldnt-pay-dividends
https://www.fool.com/investing/2017/04/10/read-this-before-you-buy-dividend-stocks.aspx

Milissa Plescia

5/15/2017 03:48:54 pm

As we learned in Principles of Accounting 2, a good buyback is one in which a company is using their excess cash to repurchase stock, when the stock is undervalued, when it is being repurchased at a set price, and when the repurchased stock is not then reissued to executives as compensation (Plescia, M., 2017). Buybacks of stock can be a smart move if it helps to raise the stock price while reducing outstanding shares. This benefit is passed on to the shareholders through higher earnings per share. However, the if the stock is being repurchased at an undervalued rate this can actually hurt current shareholders (Tully, Fortune, 2016).

Dividends should only be paid when a company has retained earning and they should only be paid out if a company can’t put those earnings to better use by expanding the business in some way. Paying a dividend is a way to encourage stockholders to remain invested in the company and to share those earning with the owners. The better the dividends, the better the investors (Keenan, the Balance, 2017).

I think investing in a dividend paying stock is a smart move provided you do your research and the company you invest in is healthy. A company that pays a dividend year after year shows that the company is consistent and successful. That dividend allows shareholders to reinvest either in the same company or in other companies without having to lose their ownership by cashing in their shares.

http://fortune.com/2016/02/02/apple-stock-buyback/

https://www.thebalance.com/determining-a-company-s-dividend-payout-policy-356100

Preston

5/15/2017 05:30:27 pm

Stock buybacks are one of those iffy things, they could be good, but they could also mean bad things on the horizon for a company and its investors. Typically a stock buyback is a good one when a company may feel the market has discounted its share price too much. A stock price can take a hit in the market for many reasons, such as, weaker-than-expected earnings results, an accounting scandal or just a poor overall economic climate. So, when a company spends millions of dollars buying up its own shares of stock, it is saying that management believes the market has gone too far in undervaluing the company and thus its shares – which is a positive sign. A bad buy back would be one when and if a company is merely using buybacks to prop up ratios, provide short-term relief to an ailing stock price or to get out from under excessive dilution.
A company that is still growing rapidly usually won't pay dividends, because it wants to invest as much as possible into further growth. Even a mature firm that believes it will do a better job of increasing its value (and therefore a better job of increasing its share price) by reinvesting its earnings will choose not to pay dividends. Companies that don't pay dividends might use the money to start a new project, acquire new assets, repurchase some of their shares or even buy out another company. However, for a mature company that doesn't need to reinvest as much in itself, and that has stable earnings, there are several reasons why issuing dividends can be a good idea. Many investors like the steady income associated with dividends, so they will be more likely to buy that company's stock. Investors also see a dividend payment as a sign of a company's strength and a sign that management has positive expectations for future earnings, which again makes the stock more attractive. A greater demand for a company's stock will increase its price. (Fontinelle, 2016)

Established dividend-paying stocks have an appeal for several reasons. There's no guarantee a stock will perform as well as it did in the past, but mainstays that have kept a steady presence in the market for decades may be less susceptible to volatility than fast-rising stocks associated with a startup. Dividend-paying stocks remain an excellent and reliable investment opportunity that consistently offer yield. They're a stable option for investors in an increasingly volatile market and usually prove to be strong long-term investments. Incorporating these stocks should be part of most investors' wealth management plans. ( ZABIEGALA, 2016)

Fontinelle, A. (2016, August 8). Why do some companies pay a dividend, while other companies do not? Retrieved May 15, 2017, from http://www.investopedia.com/ask/answers/12/why-do-some-companies-pay-a-dividend.asp
ZABIEGALA, T. (2016, October). Why You Should Invest in Dividend-Paying Stocks. Retrieved May 15, 2017, from http://www.kiplinger.com/article/investing/T018-C032-S014-why-you-should-invest-in-dividend-paying-stocks.html

Heather Hernandez

5/16/2017 05:42:50 pm

Repurchasing of company stock has overtime been used as a way to manipulate the price of stock. An increase of earning per share is a great sign of increased value for shareholders (Brageron, Kulchania & Thomas, 2011). In the modern economic times, companies have often used announcements about buybacks to their advantage to end up not executing the buyback (Bhargav, 2010). A good buyback must aim at achieving the ultimate increased value of company stock. In the event that a company stock is undergoing a successful high spell where the price-earnings ratio is exceptionally high, what would be the use of a buyback? A stock repurchase is considered good if it will add a substantial amount of earnings (Brageron, Kulchania & Thomas, 2011).

Corporations are often faced with the decision of when to reinvest retained earnings in buybacks and when to issue dividends. When evaluating the ideal time to pay out dividends, it is important to have the company in context as well as the overall industry in mind. Considering that the company is performing exceptionally well in a period when other stocks are performing conservatively, this would be an ideal period to issue dividends (Koolo & L’Her, 2010). This strategic approach seeks to attract investors, an aspect that will eventually contribute to the stability of the stock price in the market. When a company proves it can meet the satisfaction of its stock investors, then it wins their trust and additional investments are the result (Koolo & L’Her, 2010).

A company should issue dividend payouts in the event its company debt is in manageable levels. On the part of an investor, decisions are made based on whether to wait for low priced stock or buy stock that pays dividends. It is important that an investor weigh some factor before purchasing a stock. It would be prudent that an investor purchases a quality company stock at a lower price for this overtime will yield more returns than dividends (Brageron, Kulchania & Thomas, 2011). Beyond the considerations of debt positions of a company it is important that an investor evaluates the amount they are going to obtain over a given period of time to avoid low returns on their investments.

References

Bargeron, L., Kulchania, M., & Thomas, S. (2011). Accelerated share repurchases. Journal of Financial Economics, 101(1), 69-89.
Bhargava, A. (2010). An econometric analysis of dividends and share repurchases by US firms. Journal of the Royal Statistical Society: Series A (Statistics in Society), 173(3), 631-656.
Kooli, M., & L'Her, J. F. (2010). Dividends versus share repurchases evidence from Canada: 1985–2003. Financial Review, 45(1), 57-81.

Melissa P

5/16/2017 10:03:48 pm

When companies have the advantage of a good stock buyback, they know exactly when the best time to purchase back their shares. Stock buybacks benefit companies in returning cash to shareholders, reduce the total number of shares outstanding, and increase the value for the remaining shareholders. Executives know their corporation, the challenges they face, and their strategic plan better than anyone else. Hence, why they wait to repurchase their stock at a lower cost and not when it is undervalued making it a good stock buyback. (Trainer, Forbes, 2016)

A corporation makes decisions of paying dividends on a number of reasons. A few companies may prefer to reinvest all of their earnings into the company. Determining the future growth of the business, a company that is still growing or even a mature firm will choose not to pay a dividend believing that it will do a better job of increasing its value by reinvesting its earnings. Firms that do pay dividends choose to reinvest their earnings, instead of issuing dividends. This helps the firm avoid the risk of needing to raise money this way and be able to keep all of their earnings.

Like many investors, their search for a good investment in the market is to be able to find a low-risk bonds with low returns. I believe it is beneficial to invest in a dividend-paying stock as an investor. Companies that do invest in a dividend-paying stock are not as severely impacted when it enters a recession, tend to generate more income, and can also lead to tax benefits. This also demonstrates that the company is well established making it more appealing for other investors to invest in their company. (Zabiegala, Kiplinger, 2016)

Reference
http://www.kiplinger.com/article/investing/T018-C032-S014-why-you-should-invest-in-dividend-paying-stocks.html

https://www.forbes.com/sites/greatspeculations/2016/02/24/how-stock-buybacks-destroy-shareholder-value/#f0b04fc7841f

Eugene M. Chin-Young

5/16/2017 10:06:47 pm

A good buyback is buying back stock while the company has excess cash available and it buys back some of its own stocks at a price far below the companies intrinsic value, this number depends on its average market value and should be judged carefully. A corporation should start paying dividends after it is done repurchasing a fair amount of it's own stocks. They are in effect reducing the number of shares they have outstanding with these buybacks. The fact that there are now less stocks available, the current shareholders will benefit from these dividends sharing while, helping to drive the price of the stock upwards. Of course, I think it is very attractive for investors to buy dividend paying stock. It only makes sense to receive dividends from your stock purchases, as these funds can give back investors much needed money for their own benefit and personal financing use.

Danielle R

5/17/2017 04:07:21 pm

What is a good stock buyback?
In theory all stock buybacks are good. Forbes calls them a vehicle that essentially returns cash back to shareholders. Buybacks also reduce the number of shares outstanding and, in doing so, they cause inflation in the value of the stock. You would expect to see shareholders jumping for joy and toasting the Don P, right? Stock buybacks are not always what they seem, once the dust settles from the excitement the truth is often that the company is trying to hit short term targets, and pad their executive’s pockets. This could mean long term investors suffer from this quick trigger mentality. The company celebrates this short turn price boost; however, wouldn’t the better investment be looking towards the future? According to Forbes, shareholders should have the right to vote on buybacks. Putting this type of option to practice would hopefully elevate the company’s usual smoke and mirrors routine and start a new era of raising value by investing in the long term rather the short.
Alsin, Arne. “The Ugly Truth Behind Stock Buybacks” Forbes. 28 Feb 2017, https://www.forbes.com/sites/aalsin/2017/02/28/shareholders-should-be-required-to-vote-on-stock-buybacks/#3340f5bb6b1e

Should an investor buy dividend-paying stock?
Yes, as long as they buy smart. Matt Frankel author of “10 Stocks with Over 50 years of Dividend Growth” states simply that dividends provide investors income In the long run investing and reinvesting properly, growing dividends have serious compounding power. As mentioned in the article, there are companies who have been paying dividends consistently for decades. That kind of reliable supplemental income can grow an investor’s wealth faster, especially if they have the discipline to reinvest their earnings. Investors should definitely buy dividend-paying stock, but like any investment, investors should do their due diligence to ensure they are purchasing investments with consistent returns.
Frankel, Matthew. “10 Stocks With Over 50 Years of Dividend Growth” The Motley Fool, 27 Dec. 2016, https://www.fool.com/investing/2016/12/27/10-stocks-with-over-50-years-of-dividend-growth.aspx

When should a corporation pay dividends?
Corporations should pay dividends when they have a surplus of cash and distributing it to shareholders makes more sense than reinvesting it in operations. For example, Berkshire Hathaway has long avoided paying dividends to investors because Warren Buffett feels like he could make more money for his investors by reinvesting earnings rather than paying them out. However, recently Buffett and Berkshire, who is sitting on more than $90 billion in cash, announced that dividends may be coming in the near future. Why? This is what Buffett said about sitting on all that cash, "We don’t like that and we shouldn’t use your money that way for a long period of time," he said at the meeting. "There’s no way I can come back here three years from now and tell you that we hold $150 billion or so in cash or more and we think we’re doing something brilliant by doing it." Buffett only considered dividends because he is sitting on a lot of cash and he doesn’t feel comfortable investing it all.
Wiecner, Jen. “Warren Buffett Says Berkshire Hathaway Stock May Start Paying Dividends” Fortune, 6 May 2017, Web.

Danny Herran

5/17/2017 05:38:35 pm

When a stock has a good market price companies believe that buy back their own shares would rise their earning per shares. Like Apple doing a buy back in 2012 for almost 21% of its stock which benefit them to by rising their earning per share. I believe a corporation should pay a dividends when they have had a successful year in their performance. Dividends are meant for those stockholders to benefit from the profits the corporations has earned.

Jim M

5/17/2017 05:52:23 pm

Stock buybacks are a double edged sword that can either be beneficial or detrimental if you use this type of information to determine if certain stock should be purchased or not. On one hand if a company is just starting to buyback it's stock then when you purchase the stocks your share instantly give you more stake in the company and therefore is more valuable then when it was first purchased. Comparatively if a different company is buying back their stock it could be to drive market price up to prevent a hostile take over. Depending on the specific case that you are dealing with would determine what play to make. You do your research and see that a company is doing well with no apparent take over being attempted then the smart play would be to buy the stock because the company is most likely trying to drive up market value of the stock to cause growth of the company which would only help the stock you purchased in the long run. However if it is the other case and there is a hostile take over in future then you would want to play a short game and either completely avoid the stock or purchase the stock with a plan to flip it for a small quick profit.

Paying dividends is something which can be argued as either beneficial or detrimental to a company. The reason they are good is that it shows that a company is doing well and able to pay out it dividends causing more people to buy stock in the company. Why they are bad is it is preventing that money from being reinvested into the company. What should be looked at is the projected potential. If it is determined that paying dividends will cause more stock prices to go up and outweigh the cost of the dividends then it is a good move or vis versa.

As an investor the same question could be asked is will the dividends pay out be better that if the company put the money back into the company and the company then grew? Which would cause a better payout for the investor?

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